Banks drive up STI as broad market flags

The outperformance of the three banks continued yesterday, driving the Straits Times Index to fresh 21-month highs even as the broad market weakened.

Of the 26.7-point rise recorded by the STI at 3,237.81, about 20 points came from DBS Bank'$0.97 surge to $20.83.

In total, rises in the banks pushed the STI about 33 points as traders rushed to buy into the recovery theme that has taken grip after United Overseas Bank and DBS released their first quarter results.

OCBC Bank's figures are due next Tuesday.

However, excluding warrants, there were 198 rises versus 255 falls throughout the market, suggesting that the gains were narrowly focused - just as they were on Tuesday when the STI also jumped sharply.

Turnover amounted to 1.5 billion units worth $1.2 billion, down from Tuesday's $1.5 billion.

In the second line, shares of Noble Group fell $0.006 to $0.123 on volume of 341 million, making it the day's most active stock.

It has been weak ever since the company announced plans for a 10-1 share consolidation.

Many shareholders are worried that the value of their holdings could weaken after consolidation and are probably exiting before the exercise starts.

Other active stocks included ISR Capital, MDR and AddValue Tech. Index stocks that were weak included Thai Beverage, Genting Singapore and CapitaLand.

Macquarie Warrants (MW) in its daily newsletter asked if UOB's outperformance can continue.

"Macquarie Equities Research (MQ) is not quite positive on UOB because (first) MQ is cautious on its higher proportion of unsecured low-quality exposure; (second) it is least likely to surprise positively on loan loss provisions due to the absence of general provisioning write-backs made in FY16; (third) its cost-income ratio to remain elevated due to little revenue growth and sticky cost growth from ongoing investments; and (fourth) its earnings-per-share (EPS) should be impacted by the continuation of scrip dividend".

TARGET

MQ's target price for UOB is $20.50. The stock on Wednesday rose $0.44 to $23.24 on volume of five million.

Phillip Capital said it was "neutral'' on the Singapore market.

"Our bottom-up STI target is 3,200, implying a 16x PE (price earnings) FY17E. With limited upside, our preference is back to high dividend paying stocks," said Phillip.

"Why back to dividends? (First) Lingering doubts over the ability of the new US administration to cut corporate taxes or ignite infrastructure spending; (second) rising concerns over geopolitics, in particular tensions in the Korean Peninsula; and (third) weakening US economic data.

"US 10-year Treasury rates have peaked in the near-term and a reversal of expectations of higher interest rates lead us to 'Underweight' Singapore banks.

"Over the past six months, the STI has rallied in two phases. The first kicked off with a rebound in commodity prices; the second came with "hopes" of a Trumponomics reflation.

"A third potential phase, in our opinion, may be triggered by any larger than expected economic bounce in China. We await better data to affirm this."

On the subject of China, Bank of America Merrill Lynch said that China's latest Purchasing Managers' Index reading for April may be showing the first inkling of slower growth momentum, with new orders falling, albeit still at an expansionary pace.

"The risk remains that the PBOC will tighten monetary policy further to rein in excessive financial leverage, resulting in slower H2 China growth.

"Given this H2 China risk, coupled with limited upside for energy prices, we are reluctant to chase 18 consecutive weeks of inflows into emerging markets."

This article appears in The Business Times today. For full listings of SGX prices, go to btd.sg/BTmkts